Wrong-Footed Day Traders Learn the Dangers of Fighting the Bank of Japan

(Bloomberg) -- Bond vigilantes bowed to the might of the Bank of Japan last week but its historic market intervention also sent another cohort scrambling to cut their losses -- retail traders with record bullish bets on the yen.

Japan's individual investors cut aggregate net-long positions on their home currency by 56.1 billion yen ($457 million) from near a record high during four days of BOJ intervention last week, according to a Bloomberg analysis of Tokyo Financial Exchange Inc. data. The central bank sent the yen spiraling to a near seven-year low after announcing an unlimited bond-buying spree, reinforcing its policy divergence with other major central banks that are raising rates.

How Japan Took on the Bond Vigilantes and Won — For Now

Just one week before, the mom-and-pop traders had built up aggregate bullish wagers on the currency to an all-time high versus 14 peers, despite traditionally holding net-short positions in a quest for higher yields abroad.

Day Traders in Japan Bet the World Is Wrong About a Weak Yen

Japan's retail traders are known for their contrarian stance, but it's rare for them to hold bullish yen bets because doing so can often incur extra costs known as negative carry. Should yen weakness persist thanks to the central bank reasserting its dovish policy, they may switch back to join hedge funds bearish on the currency, helping accelerating its decline.

“I'm surprised they even went so long in the first place -- it was not a great risk-reward trade, and clearly traders are saying now ‘wow, in hindsight it's a mistake in a world of rising rates,'” said Stephen Miller, an investment consultant at GSFM, a unit of Canada's CI Financial Corp. “I see them flipping to a net short quite quickly here. Pretty soon, that yield differential story is going to be meaningful again, if it isn't already.”

Yield Gap Pressure

While surging inflation in other parts of the world spurs policy makers to raise interest rates, the BOJ stands out with a commitment to lower yields to boost the moribund local economy. But by stepping in to push yields lower last week, it heaped pressure on the yen as investors bet on a widening gap between Japan and overseas peers such as the U.S.

Yen Tumbles to Seven-Year Low as BOJ Diverges Further From Fed

The yen is the worst-performing Group-of-10 currency against the dollar this year and fell almost 6% in March. It touched the 125 per dollar level for the first time since 2015 on March 28 before recovering to trade around the 122.50 level on Tuesday.

BOJ Governor Haruhiko Kuroda told lawmakers Tuesday that the recent movements in Japan's currency have been on the rapid side.

“It was an absolute perfect storm for yen bulls and these Japanese retail investors were caught out,” said Nick Twidale, chief executive Asia Pacific at foreign-exchange broker FP Markets in Sydney. “It's a lesson of how you can get things very wrong if you're betting against a big trend -- in this case rising U.S. yields and diverging monetary policy.”